Consider an FI Holds Two Loans with the Following Characteristics

question 40

Multiple Choice

Consider an FI holds two loans with the following characteristics: $\begin{array}{c|c|c|c|c|c|}\hline \text { Loan i } & \text { Weight I } & \begin{array}{c}\text { Annual spread between loan rate and Fl's } \\\text { cost of funds }\end{array} & \begin{array}{c}\text { Annual fees } \\\text { Loss to Fl given } \\\text { default }\end{array} & \begin{array}{c}\text { Lected default } \\\text { frequency }\end{array} \\\hline 1 & 0.45 & 3.5 \% & 1.5 \% & 30 \% & 4 \% &\mathrm { P } _ { 12 } =-0.20\\\hline 2 & 0.55 & 4.5 \% & 2.0 \% & 25 \% & 3 \% \\\hline\end{array}$
What is the return on the loan portfolio (round to two decimals) ?

• A)3.80%
• B)5.75%
• C)9.55%
• D)4.87%

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Definitions:

Cost-volume-profit Analysis

An accounting technique that analyzes how changes in costs, sales volume, and price affect a company's profit.

Contribution Margin Ratio

The contribution margin ratio quantifies the portion of sales revenue that is not consumed by variable costs and is available to cover fixed costs and generate profit.

Variable Costs

Costs that change in proportion to the level of activities or volume of production in a business.

Fixed Costs

Expenses that do not fluctuate with changes in production level or sales volume.